Is this an early canary whistling a different tune about the health of the US economic expansion?
Ford, America’s second biggest car company, warned late last year that profits in 2017 would be hit by slowing sales, rising investment in products such as driverless cars and technology upgrades for new models.
Overnight Thursday, the giant put more flesh on that forecast, warning first quarter earnings could drop by 40% to 50%.
If other car companies, such as GM and Fiat Chrysler start issuing similar warnings then we will now the car sector – perhaps the most buoyant part of the US economy in the GFC rebound – has developed a slow leak in demand.
Ford said the slowing pace of new car demand in the US and those rising costs could halve its first-quarter earnings per share compared with last year’s record first quarter.
The question for analysts is how much of Ford’s slow down is due to lower sales (and higher production costs) and the rising level of investment in new technologies ($US1 billion in a new driverless car unit over the next five years alone). If it is the former, then watch out for rising stocks of unsold cars, cuts to production, factory closures and job losses – which will upset President Trump.
And as a result, it is looking at a 10% plus fall in pre tax earnings for all of 2017 to $US9 billion from $US10.4 billion in 2016.
The company said that while it expects global auto sales to grow 1.8% to 92.9 million in 2017, sales in the US are to fall 1.1% to 17.7 million vehicles despite “solid” conditions in the American economy. Sales in China are seen falling 1.0% to 27.5 million units this year, due to receding tax cut benefits in 2017 and 2018.
It expects profits to rise again in 2018.
Stuart Pearson, auto analyst at Exane BNP Paribas, said Ford’s comments could exacerbate market concerns about US carmaker profits. “Weaker than expected pricing data points at the start of 2017 has made investors incrementally more nervous on the profit outlook for the US post the strong Trump rally,” he wrote in a note. “Ford’s comments will likely only add to these concerns.
“Although Ford is keeping [full-year] guidance unchanged, it would appear that they are increasingly dependent on [second-half] performance,” he pointed out.
Now Ford’s warning could be reversed if President trump lifts his game, but Wall Street is now nervously looking at his performance and if Trump doesn’t improve, a big sell off could be triggered.
The question is whether this nervousness is the market getting ahead of itself, or reflecting concerns that the pace of activity in the US economy is looking weak.
Current forecasts for first quarter GDP growth (due out around Friday, April 28) are centres at 1% annual or less, which would be a sharp slowing from the 1.9% annual rate in the 4th quarter of last year, and a near collapse from the 3.5% pace in the September quarter.
While business investment is solid, anecdotal reports say much of the recent strength is liked to the surge in investment in shale oil production after the big downturn from late last year. US oil rig is up more than 50% from a year ago and uS oil production is now well ahead of the leve a year ago at 9.129 million barrels a day last week.
